Statement on Consideration of Adopting New Ethics and Independence Rule Concerning Communications with Audit Committees and Amending its Existing Tax Services Rule

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Date

April 22, 2008

Speaker

Mark W. Olson, Chairman

Event

PCAOB Open Board Meeting

Location

Washington, DC

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A motion has been made and seconded, so the question before the Board is whether to adopt an ethics and independence rule on communication with audit committees, and its related amendment to the Board’s interim independence standards; and an amendment to Rule 3523 (Tax Services for Persons in Financial Reporting Oversight Roles) along with a further adjustment to the implementation schedule for Rule 3523 as presented to us today by staff.

Before I ask my fellow Board members for their comments, I want to thank Tom Ray, Greg Scates, Bella Rivshin, and other staff involved for their hard work in developing the rule and amendment that we are considering today.

As staff has just outlined, the rule under consideration today builds on the communication requirement in ISB No. 1, which requires, among other things, a firm to annually disclose to the audit committee all relationships between the auditor and its related entities and the company and its related entities that may reasonably be thought to bear on independence. Rule 3526 will improve ISB No. 1, by requiring the communications about independence before a firm becomes the issuer's auditor of record, as well as annually thereafter.

Comments received on the proposed rule were encouraging and generally supported the rule as an enhancement to auditor communication.

Rule 3526 will help audit committees make more informed decisions when hiring their auditors by strengthening and enhancing the communication requirements for auditors regarding their firms’ independence. I am supportive of the modifications that the rule will make to ISB No. 1 as they will enhance information provided to audit committees that may bear on the firms’ independence before they select their auditors. I also believe that real value will be derived from the requirement that accounting firms discuss the potential effects of these relationships on the firms’ independence with the audit committees.

As staff already have described in detail, the Board is asked to consider their recommendation to adopt an amendment to Rule 3523, and to further adjust the implementation schedule for that rule to allow time for implementation.

With regard to the amendment to Rule 3523, as Tom Ray outlined, the Board solicited two rounds of comments – through both a concept release and the rulemaking proposal - on the effects on independence of providing tax services to a person covered by Rule 3523 during the portion of the audit period that precedes the professional engagement period, and other practical consequences of applying the rule to that time period. Most comments agreed with the proposal to exclude that period and many indicated that independence would not be affected by providing services during that period.

I support the staff’s recommendation. After careful consideration of comments received, it is appropriate to move forward and amend rule 3523 to exclude the portion of the audit period that precedes the professional engagement period from the scope of the rule. Under the rule, as amended, audit firms would continue to be prevented from providing tax services to persons covered by Rule 3523 once the professional engagement period has commenced. In addition, even if a particular tax engagement is not prohibited by Rule 3523, an auditor would still need to consider the relevant facts and circumstances to determine whether it impairs independence under the SEC’s general standard. By taking a more targeted approach in this area, I believe that audit committees’ choice of auditor will not be restricted unnecessarily.